Bill Gurley Explains How Twitter Will Rule The World And Why Groupon Won't

BI: I saw you tweeted about the Groupon S-1, and the removal of marketing costs from their expenses, and I liked how you linked back to a 1998 post about EBITDA earnings. Is this an indication that we're in 1998 all over again? Or are investors smarter this time around?

BG: I think there are lot of indications that we're in more bubbly times than we've been in the past 8 years. The careless behavior in the late-stage private markets is a big sign of that, that's more endemic to Silicon Valley than anywhere. People are falling all over themselves to buy shares of a company where they've never seen the financials. There's a lot of that going on. Probably some of those members who bought the Series E in Groupon.

BI: LinkedIn went crazy on the opening day of its IPO, but Pandora didn't. Are investors a little more cautious this time around?

BG: So far they are. Believe it or not, I think what happened with Pandora is healthy for the market. First day pops -- the press is ridiculous, they treat first-day pops as if they're good. They're really bad for the company because it means they gave away way more of the company than they should have and institutional investors were given a freebie by the investment bank.

If that happens again and again, you have manias. Sanity is fine. Even where Pandora is now, $12 or 1$3, it's still a really strong valuation relative to their fundamentals.

LinkedIn is a very different company, I don't know if it's worth $75 or $50, but it's worth a lot more than most companies. It'll be interesting to see Groupon try to price because I don't think it has the business characteristics of a LinkedIn.

BI: No network effects?

BG: I wrote a post a few weeks back called "All Revenue Is Not Created Equal" and talked about 10 things that differentiate high-quality revenue companies from low-quality. Network effect is a very strong barrier to entry, if you have that it's the golden ticket. But there are valuable companies that don't have that.

But the daily deals space, I don't think there are any barriers to entry at all. If you had a continuum of barriers to entry between -10 to +10, you might put something with a network effect at 9 or 9 1/2. The daily deals space, with all the data we've seen, it would be a negative 9 1/2. It's the opposite end of the continuum. Everybody and their brother has entered this space. There's really not that much they do. They're about coupons.

BI: Is there any benefit from them getting to huge scale fast? Like Amazon did?

BG: The Q1 financials put a knife in anyone who would argue that. If $2.4 billion in sales is not scale then there is no such thing. You should be at scale by then.

I think it's going to be interesting for some of these companies to become public because this late-stage private market is really reckless, and they're not nearly as smart as the buy side is as a whole. So they're making valuation judgments but they haven't been tested through a combination of a liquid marketplace that trades daily and an SEC requirement to share audited financials on a periodic basis. Until you have those things, you don't have a scoreboard, you just have a bunch of speculation. We'll learn a ton when they finally price.

The thing that will put an end to the highly speculative second market is when something prices at an IPO that's well below what some of those trades took at. That'll be the day sanity comes to that market.